You can run your own private island, but if you want to be "part of the fediverse" then you need to peer with servers in the main network, right? Which means tyranny-of-structurelessness organisational politics, because each admin gets to make their own rules about who they peer with, and so if there are disagreements in the network then you have to pick a side.
Sounds like normal human interaction to me. This is a feature, not a bug as far as I'm concerned.
If these three were the only instances in the world then, yes, A could be so strict it also blocks C because of it's communication with B. But since there are hundreds of these instances and since there is no limit on how many can be created this will not be a problem.
Admins can be dictators on their own instance, but there are a lot of admins to choose from. If a big instance goes sour, it is very easy to migrate to another one.
Instances will refuse to federate with your instance if your instance fails to block others that they don't like, and the list is steadily growing.